Units in the Fonterra Shareholders’ Fund hit a record low after the dairy cooperative cut its forecast earnings and said it won’t pay an interim dividend.
Fonterra downgraded its earnings forecast to 15-25 cents per share from a previous forecast of 25-35 cents per share, blaming the increased milk price which saw it hike the farmgate price to its supplier-shareholders.
The downgrade implies annual earnings of between $242-403 million in the year ending July, compared to the earlier projection of $403-564 million.
The units fell as low as $4.28 after the announcement. The units, which give outside investors exposure to the farmer-owned cooperative but no voting rights, sold for $5.50 in the 2012 initial public offering. They closed at $6.85 on the first day of trading.
The news “is yet another reminder of the poor position that unitholders face when investing in FSF,” said Oyvinn Rimer, a senior research analyst at Harbour Asset Management. “The decision to suspend dividend payments, the only source of economic value for unitholders, as earnings disappointed and a priority to service high debt levels means a declining investment case to own these securities,”
Fonterra’s board will decide on whether to pay a final dividend and is reviewing its dividend policy as part of its wider strategic review, it said today.
Interim chief executive Miles Hurrell told journalists on a conference call that he couldn’t predict how unitholders would react but, from Fonterra’s perspective, “this is not the outcome we would have liked.” He said the company is closely focused on a strategic review as “we can’t continue to operate like this.”
The cooperative announced a “full stocktake and portfolio review” in September after announcing its first full-year loss in its 18-year history. That is looking at all its major investments, assets and joint ventures to see how they are performing and where they fit within its strategy.
Chair John Monaghan said the review is not aimed at “tinkering around the edges” but is looking at fundamental changes and will provide an update in March.
Rimer said the detail had yet to be seen but “the reluctance previously seen for any meaningful change has been highly tangible.”
He noted that at the time of the IPO of the fund, “there was a strong desire of the market that the company issued more equity capital, but that wasn’t offered as an option. At this point in time, it will be a lot harder to raise capital and some difficult decisions need to be made to address the balance sheet.”